QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 1, 2018

OR

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-10079

CYPRESS SEMICONDUCTOR CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

94-2885898

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

198 Champion Court, San Jose, California 95134

(Address of principal executive offices and zip code)

(408) 943-2600

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐ (Do not check if a smaller reporting company)

Smaller reporting company

☐

Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The total number of outstanding shares of the registrant’s common stock as of July 20, 2018 was 361,539,110.

This Quarterly Report on Form 10-Q (this "Quarterly Report") contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not historical facts and include statements relating to, among other things, the future results, operations, strategies, and prospects of Cypress Semiconductor Corporation and its consolidated subsidiaries ("Cypress," the "Company," "we," or "us"), and can in some cases be identified by our use of words such as "may," "will," "should," "plan," "anticipate," "believe," "expect," "future," "intend," "estimate," "predict," "potential," "continue," and similar expressions. This Quarterly Report includes, among others, forward-looking statements regarding: our expectations regarding dividends, debt repayments, and stock repurchases; our expectations regarding restructuring plan costs and effects; our expectations regarding active litigation matters; the sufficiency of our cash, available-for-sale investments, and borrowing arrangements to meet our requirements for the next 12 months; possible recognition of certain unrecognized tax benefits within the next 12 months; the potential impact of our indemnification obligations; and our plans to remediate an identified material weakness in internal control over financial reporting. Our forward-looking statements are based on the expectations, beliefs and intentions of, and the information available to, our executive management on the filing date of this Quarterly Report. Readers are cautioned not to place undue reliance on forward-looking statements. Except as required by law, we assume no responsibility to update our forward-looking statements.

The forward-looking statements in this Quarterly Report involve risks and uncertainties. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to: potential disruptions in the international trade and investment environment, including deteriorating relationships between the U.S. government and foreign governments; the current and future state of the general economy and its impact on the markets and consumers we serve (including credit conditions); our ability to execute on our Cypress 3.0 strategy and our margin improvement plan; potential volatility in our stock price; risks related to paying down our indebtedness and meeting the covenants set forth in our debt agreements; our efforts to retain and expand our customer base (which may be adversely affected if we were to raise prices) in the intensely competitive and rapidly evolving semiconductor industry; risks related to significant supply and demand volatility in semiconductor markets (including the challenges of forecasting demand, scheduling production, and making timely delivery on customer orders); risks related to our strategy of developing and maintaining a leading portfolio of programmable microcontroller, connectivity and memory products; risks related to our flexible manufacturing strategy (and the challenge of efficiently managing a smaller number of manufacturing facilities while increasing our reliance on third-party manufacturers); our reliance on distributors and resellers; risks related to our "take or pay" agreements with certain vendors; the risk of defects, errors, or security vulnerabilities in our products; risks related to the integrity of our information systems, including the possibility of cyber-attacks, business-activity disruption, and loss or corruption of sensitive data; changes in tax law and policy; risks related to our pending tax examinations; risks related to our tax incentive/holiday arrangements in Malaysia, the Philippines, and Thailand; our efforts to remediate any material weakness in our internal control over financial reporting; potential lack of liquidity for certain strategic investments (including the challenge of disposing of businesses, product lines, or assets on favorable terms in a timely manner); risks related to our restructuring activities; the failure or success of the privately-held companies in which we are invested; the challenges of effectively integrating companies and assets that we acquire; the possibility of impairment charges; the challenges of attracting and retaining key personnel; risks related to our reliance on stock-based compensation; possible changes to our dividend policy; risks related to our share repurchase authorization; the uncertain nature of business outlook guidance; risks related to industry consolidation and the challenge of competing effectively against a smaller number of stronger companies; the challenges of adequately protecting our intellectual property rights and risks of intellectual property litigation; the possibilities that activist stockholders could negatively affect our business and that our deferred tax assets could be negatively impacted by changes in our stockholder base; risks associated with international operations; the challenges and costs of complying with environmental, data privacy, health/safety, and other laws; risks related to "conflict minerals" reporting; the possibility of business disruptions due to natural disasters; risks arising from indemnification commitments to our officers and directors; our ability to manage our financial investments and interest rate and exchange rate exposure; and the uncertainty and expense of pending litigation matters. These and other factors are described in more detail in Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (our "Annual Report"), which item is incorporated herein by reference; Part I, Item 3 (Quantitative and Qualitative Disclosures about Market Risk) in this Quarterly Report; and/or Part II, Item 1A (Risk Factors) in this Quarterly Report.

Cypress Semiconductor Corporation (together with its consolidated subsidiaries, "Cypress" or the "Company") reports on a fiscal-year basis. The Company ends its quarters on the Sunday closest to the end of the applicable calendar quarter, except in a 53-week fiscal year, in which case the additional week falls into the fourth quarter of that fiscal year. Fiscal years 2018 and 2017 each contain(ed) 52 weeks. The second quarter of fiscal 2018 ended on July 1, 2018 and the second quarter of fiscal 2017 ended on July 2, 2017.

Basis of Presentation

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and include the accounts of Cypress Semiconductor Corporation and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments of a normal, recurring nature, which are necessary to state fairly the financial information included therein. These financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in Cypress' Annual Report on Form 10-K for the fiscal year ended December 31, 2017. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

Certain balances included on the Consolidated Balance Sheets and in the Consolidated Statements of Cash Flows for prior periods have been reclassified to conform to the current period presentation. Beginning fiscal year 2018, the Company is allocating the amortization of acquisition-related intangible assets, restructuring costs and certain other expenses by function in the Consolidated Statements of Operations. The Consolidated Statements of Operations for the prior comparative periods have been reclassified to conform to the current period presentation as follow:

Three Months Ended July 2, 2017

As Revised*

Reclassification

As Adjusted

(In thousands)

Cost of revenues

356,761

44,270

401,031

Research and development

88,237

358

88,595

Selling, general and administrative

77,591

17,667

95,258

Amortization of intangible assets

49,354

(49,354

)

—

Costs and settlement charges related to shareholder matter

12,043

(12,043

)

—

Restructuring costs (benefit)

898

(898

)

—

Operating income

8,892

—

8,892

8

Six Months Ended July 2, 2017

As Revised*

Reclassification

As Adjusted

(In thousands)

Cost of revenues

688,129

87,668

775,797

Research and development

175,233

2,710

177,943

Selling, general and administrative

151,586

25,005

176,591

Amortization of intangible assets

97,603

(97,603

)

—

Costs and settlement charges related to shareholder matter

14,310

(14,310

)

—

Restructuring costs (benefit)

3,470

(3,470

)

—

Operating loss

(4,681

)

—

(4,681

)

* See "Revision of prior period financial statements" below.

Results reported in the Condensed Consolidated Statements of Operations for the three and six months ended July 1, 2018 are not necessarily indicative of the results to be expected for the full fiscal year.

Summary of Significant Accounting Policies

The Company'ssignificant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

Recent Accounting Pronouncements Not Yet Adopted

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2016-02, "Leases, (Topic 842)," which replaces most current lease guidance when it becomes effective. This standard update intends to increase the transparency and improve comparability by requiring entities to recognize assets and liabilities on the balance sheet for all leases, with certain exceptions. The new standard states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the Consolidated Statements of Operations. The new guidance will be effective for the Company starting in the first quarter of fiscal 2019. Early adoption is permitted. The Company is currently evaluating the effect that the new guidance will have on its consolidated financial statements and related disclosures.

In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The amendments in ASU 2017-12 are intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. The guidance in ASU 2017-12 is effective for annual periods beginning after December 15, 2018 and for interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.

9

In February 2018, the FASB issued ASU No. 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." The amendments in ASU 2018-02 are intended to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The guidance in ASU 2018-02 is effective for annual periods beginning after December 15, 2018 and for interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.

In February 2018, the FASB issued ASU No. 2018-03, "Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." The corrections and improvements are effective for the Company for fiscal years beginning after December 15, 2017 and for interim periods within those fiscal years beginning after June 15, 2018. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements and related disclosures.

Recently Adopted Accounting Pronouncements

Adoption of ASU No. 2014-09, Revenue from Contracts with Customers:

In May 2014, the FASB issued an ASU on revenue from contracts with customers, ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." This standard update outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The guidance is effective for annual reporting periods beginning after December 15, 2017 and for interim periods within those fiscal years. Collectively, we refer to ASU No. 2014-09, its related amendments, and Subtopic 340-40 as "Topic 606."

On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to all contracts that are not completed contracts at the date of initial application (i.e., January 1, 2018). Results for reporting periods after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605. There was no impact on the opening accumulated deficit as of January 1, 2018 due to the adoption of Topic 606. We reclassified the sales return reserve to current liabilities presented as "Price adjustment and other revenue reserves" from the allowance for accounts receivable due to the adoption of Topic 606.

Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Sales of products with alternative use account for the majority of our revenue and are recognized at a point in time, the timing of such recognition remained the same under Topic 606.

Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer and deposited with the relevant government authority, are excluded from revenue. The Company's revenue arrangements do not contain significant financing components.

Revenue is recognized over a period of time when it is assessed that performance obligations are satisfied over a period rather than at a point in time. When any of the following criteria is fulfilled, revenue is recognized over a period of time:

(a)

The customer simultaneously receives and consumes the benefits provided by the performance as Cypress performs.

(b)

Cypress’ performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced.

(c)

Cypress’ performance does not create an asset with an alternative use, and Cypress has an enforceable right to payment for performance completed to date.

We then select an appropriate method for measuring progress toward complete satisfaction of the performance obligation, usually costs incurred to date relative to the total expected costs to the satisfaction of that performance obligation.

Sales to certain distributors are made under arrangements that provide the distributors with price adjustments, price protection, stock rotation and other allowances under certain circumstances. These adjustments and allowances are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenue recognized. We believe that there will not be significant changes to our estimates of variable consideration.

Our non-recurring engineering ("NRE") contracts with customers may include multiple performance obligations. For NRE arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine the standalone selling price of intellectual property licenses based on the residual approach, and service based on cost

10

plus a reasonable margin. We recognize revenue in the amount to which we have a right to invoice, if the right to consideration from the customer is in an amount that corresponds reasonably with the value to the customer of the entity’s performance completed to date.

We license or sell our rights to use portions of our intellectual property ("IP") portfolio, which includes certain patent rights useful in the manufacture and sales of certain products. IP revenue recognition is dependent on the nature and terms of each agreement. We recognize IP revenue upon delivery of the IP if we have no substantive future obligation to perform under the arrangement. We defer recognition of IP revenue where future performance obligations are required to earn the revenue or the revenue is not guaranteed. Sales-based or usage-based royalties from license of our IP are recognized at the later of the period the sales or usages occur or the satisfaction of the performance obligation to which some or all of the sales-based or usage-based royalties have been allocated.

If a customer pays consideration, or Cypress has a right to an amount of consideration that is unconditional before we transfer a good or service to the customer, those amounts are classified as deferred income/ advances received from customers which are included in other current liabilities or other long-term liabilities when the payment is made or it is due, whichever is earlier.

If the arrangement includes variable contingent consideration, the Company recognizes revenue over time if management can reasonably measure its progress or is capable of providing reliable information as required to apply an appropriate method of measuring progress.

Practical Expedients and Elections

Sales commissions are owed and are recorded at the time of sell-through of our products to end customers. These costs are recorded within sales and marketing expenses.

We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

We have elected to account for shipping and handling costs as fulfillment costs after the customer obtains control of the goods.

Other Recently Adopted Pronouncements:

In October 2016, the FASB issued ASU 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory." For public entities, ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted this guidance in the first quarter of fiscal 2018. The adoption of this guidance did not have a material impact on its consolidated financial statements and related disclosures.

In November 2016, the FASB issued ASU 2016-18 Restricted Cash, which requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 (including interim periods within those periods) using a retrospective transition method to each period presented. The Company adopted the provisions of ASU 2016-18 as of January 1, 2018. There was no material impact on the Company's consolidated financial statements resulting from the adoption of this guidance.

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." The standard eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. The standard is effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company adopted this guidance in the first quarter of fiscal 2018. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements and related disclosures.

In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting." ASU 2017-09 amends the requirements in GAAP related to accounting for changes to stock-based compensation awards. The guidance in ASU 2017-09 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted this guidance in the first quarter of fiscal 2018. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements and related disclosures.

11

Revision of Prior Period Financial Statements

During the fiscal year ended December 31, 2017, the Company identified and recorded certain immaterial errors that originated in fiscal years ended January 1, 2017 and January 3, 2016. These errors consisted primarily of errors in certain assumptions and calculations used in the determination of non-cash stock-based compensation primarily relating to the Employee Stock Purchase Plan ("ESPP"). The Company determined that the errors were not material to the previously issued financial statements and disclosures included in its Annual Report on Form 10-K for the year ended December 31, 2017 or for any quarterly periods included therein.

For the three and six months ended July 1, 2018, the Company is presenting comparative fiscal 2017 quarterly information. The fiscal 2017 results for the three and six months ended July 2, 2017 have been revised to reflect the quarterly impact of the adjustments described above.

The effect of the immaterial corrections on the Consolidated Statements of Operations for the three and six months ended July 2, 2017 is as follows:

Three Months Ended July 2, 2017

Revised Consolidated Statements of Operations Amounts

As previously reported

Adjustments

As revised

(In thousands, except per-share amounts)

Cost of revenues

$

357,594

$

(833

)

$

356,761

Research and development

89,736

(1,499

)

88,237

Selling, general and administrative

81,243

(3,652

)

77,591

Total costs and expenses

590,868

(5,984

)

584,884

Operating loss

2,908

5,984

8,892

Loss before income taxes and non-controlling interest

(13,499

)

5,984

(7,515

)

Net loss

(22,838

)

5,984

(16,854

)

Net loss attributable to Cypress

$

(22,904

)

$

5,984

$

(16,920

)

Net loss per share attributable to Cypress:

Basic

$

(0.07

)

$

0.02

$

(0.05

)

Diluted

$

(0.07

)

$

0.02

$

(0.05

)

Six Months Ended July 2, 2017

Revised Consolidated Statements of Operations Amounts

As previously reported

Adjustments

As revised

(In thousands, except per-share amounts)

Cost of revenues

$

690,408

$

(2,279

)

$

688,129

Research and development

178,217

(2,984

)

175,233

Selling, general and administrative

155,090

(3,504

)

151,586

Total costs and expenses

1,139,098

(8,767

)

1,130,331

Operating loss

(13,448

)

8,767

(4,681

)

Loss before income taxes and non-controlling interest

(49,214

)

8,767

(40,447

)

Net loss

(68,556

)

8,767

(59,789

)

Net loss attributable to Cypress

$

(68,686

)

$

8,767

$

(59,919

)

Net loss per share attributable to Cypress:

Basic

$

(0.21

)

$

0.03

$

(0.18

)

Diluted

$

(0.21

)

$

0.03

$

(0.18

)

12

The effect of the immaterial corrections on the Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended July 2, 2017 is as follows:

Three Months Ended July 2, 2017

Revised Consolidated Statements of Comprehensive Income (Loss):

As previously reported

Adjustments

As revised

(In thousands)

Net loss

$

(22,838

)

$

5,984

$

(16,854

)

Comprehensive loss

(21,857

)

5,984

(15,873

)

Comprehensive loss attributable for Cypress

$

(21,923

)

$

5,984

$

(15,939

)

Six Months Ended July 2, 2017

Revised Consolidated Statements of Comprehensive Income (Loss):

As previously reported

Adjustments

As revised

(In thousands)

Net loss

$

(68,556

)

$

8,767

$

(59,789

)

Comprehensive loss

(63,082

)

8,767

(54,315

)

Comprehensive loss attributable for Cypress

$

(63,212

)

$

8,767

$

(54,445

)

The effect of the immaterial corrections on the Consolidated Statements of Cash Flows for the six months ended July 2, 2017 is as follows:

Six Months Ended July 2, 2017

Revised Consolidated Statements of Cash Flows:

As previously reported

Adjustments

As revised

(In thousands)

Net (loss) income

$

(68,556

)

$

8,767

$

(59,789

)

Stock-based compensation expense

56,271

(8,767

)

47,504

Net cash provided by operating activities

$

58,168

$

—

$

58,168

The effect of the immaterial corrections on the disclosures related to stock-based compensation for the three and six months ended July 2, 2017 is as follows:

Three Months Ended July 2, 2017

Revised Stock-Based Compensation Footnote:

As Reported

Adjustments

As Revised

(In thousands)

Cost of revenues

$

4,833

$

(833

)

$

4,000

Research and development

11,275

(1,499

)

9,776

Selling, general, and administrative

14,226

(3,652

)

10,574

Total stock-based compensation expense

$

30,334

$

(5,984

)

$

24,350

13

Six Months Ended July 2, 2017

Revised Stock-Based Compensation Footnote:

As Reported

Adjustments

As Revised

(In thousands)

Cost of revenues

$

10,164

$

(2,279

)

$

7,885

Research and development

23,046

(2,984

)

20,062

Selling, general, and administrative

23,061

(3,504

)

19,557

Total stock-based compensation expense

$

56,271

$

(8,767

)

$

47,504

NOTE 2. REVENUE

The following table presents the Company's revenue disaggregated by revenue source, segment and geographical locations:

The following table presents details of the Company's intangible assets:

16

As of July 1, 2018

As of December 31, 2017

Gross

AccumulatedAmortization

Net

Gross

AccumulatedAmortization

Net

(In thousands)

Developed technology and other intangible assets

Acquisition-related intangible assets

$

1,162,365

$

(595,789

)

$

566,576

$

1,072,824

$

(490,327

)

$

582,497

Non-acquisition related intangible assets

19,884

(13,349

)

6,535

19,884

(10,828

)

9,056

Total developed technology and other intangible assets

1,182,249

(609,138

)

573,111

1,092,708

(501,155

)

591,553

In-process research and development

34,026

—

34,026

123,567

—

123,567

Total intangible assets

$

1,216,275

$

(609,138

)

$

607,137

$

1,216,275

$

(501,155

)

$

715,120

The below table presents details of the in-process research and development assets as of July 1, 2018:

(In thousands)

As of December 31, 2017

$

123,567

Technological feasibility achieved

(89,541

)

As of July 1, 2018

$

34,026

During the three months ended July 1, 2018, there were no projects that had reached technological feasibility and were transferred to developed technology.

During the six months ended July 1, 2018, three projects representing $89.5 million of the total capitalized in-process research and development ("IPR&D"), with estimated useful lives of 5 years, had reached technological feasibility and were transferred to developed technology.

The following table summarizes the amortization expense by line item recorded in the Condensed Consolidated Statements of Operations:

Three Months Ended

Six Months Ended

July 1, 2018

July 2, 2017

July 1, 2018

July 2, 2017

(In thousands)

Cost of revenues

$

48,102

$

44,270

$

96,204

$

87,437

Research and development

1,261

—

2,521

—

Selling, general and administrative

4,310

5,084

9,258

10,166

Total amortization expense

$

53,673

$

49,354

$

107,983

$

97,603

The estimated future amortization expense related to developed technology and other intangible assets as of July 1, 2018 is as follows:

(In thousands)

2018 (remaining six months)

105,996

2019

205,726

2020

144,654

2021

49,982

2022

28,747

2023 and thereafter

38,006

Total future amortization expense

$

573,111

17

NOTE 5. INVESTMENT IN EQUITY METHOD INVESTMENTS

Privately-held equity investments in entities the Company does not control are accounted for under the equity method of accounting if the Company has an ownership interest of 20% or greater or if it has the ability to exercise significant influence over the operations of such companies.

Enovix Corporation ("Enovix")

During the fourth quarter of fiscal 2017, the Company determined that its investment in Enovix, which is accounted for as an equity method investment, had suffered an other-than temporary impairment primarily because Enovix had not achieved certain key planned product development milestones. Consequently, the Company recognized a charge of $51.2 million during the fourth quarter of fiscal 2017, reducing its carrying value to zero as of December 31, 2017. The Company held 41.1% of Enovix's outstanding voting shares as of July 1, 2018.

Deca Technologies Inc. ("Deca")

The Company held 52.5% of Deca's outstanding voting shares as of July 1, 2018 and December 31, 2017. The Company's investment in Deca is accounted for as an equity method investment.

The below table presents the changes in carrying value of the equity method investment related to Deca.

As of July 1, 2018

Deca Technologies Inc.

(in thousands)

Carrying value as of December 31, 2017

$

122,514

Equity in net loss of equity method investee

(7,216

)

Carrying value as of July 1, 2018

$

115,298

The following table presents summarized aggregate financial information derived from the respective consolidated financial statements of Deca for the three and six month ended July 1, 2018, and of Deca and Enovix for the three and six months ended July 2, 2017.

Three Months Ended

Six Months Ended

July 1, 2018

July 2, 2017

July 1, 2018

July 2, 2017

(In thousands)

Operating data:

Revenue

$

4,453

$

4,515

$

8,602

$

7,410

Gross loss

(3,056

)

(1,754

)

(5,377

)

(3,941

)

Loss from operations

(7,091

)

(9,852

)

(13,840

)

(20,011

)

Net loss

(7,137

)

(9,903

)

(13,777

)

(20,974

)

Net loss attributable to Cypress

(3,744

)

(4,612

)

(7,227

)

(9,803

)

The following table represents the assets and liabilities held by Deca as of July 1, 2018, and by Deca and Enovix as of December 31, 2017.

As of

As of

July 1, 2018

December 31, 2017

(In thousands)

Balance Sheet Data:

Current Assets

$

38,744

$

70,101

Long-term Assets

54,241

55,673

Current Liabilities

9,455

15,615

Long-term Liabilities

7,707

1,859

18

NOTE 6. FAIR VALUE MEASUREMENTS

Assets/Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the fair value hierarchy for the Company's financial assets and liabilities measured at fair value on a recurring basis as of July 1, 2018 and December 31, 2017:

As of July 1, 2018

As of December 31, 2017

Level 1

Level 2

Total

Level 1

Level 2

Total

(In thousands)

Financial Assets

Cash equivalents:

Money market funds

$

59,138

$

—

$

59,138

$

20,477

$

—

$

20,477

Total cash equivalents

59,138

—

59,138

20,477

—

20,477

Other current assets:

Certificates of deposit

—

870

870

—

972

972

Total other current assets

—

870

870

—

972

972

Employee deferred compensation plan assets:

Cash equivalents

2,248

—

2,248

3,561

—

3,561

Mutual funds

29,674

—

29,674

27,321

—

27,321

Equity securities

9,090

—

9,090

12,994

—

12,994

Fixed income

3,804

—

3,804

3,415

—

3,415

Stable value funds

1,828

1,828

—

2,204

2,204

Total employee deferred compensation plan assets

44,816

1,828

46,644

47,291

2,204

49,495

Interest rate swap

—

4,899

4,899

—

—

—

Foreign exchange forward contracts

—

1,086

1,086

—

1,197

1,197

Total financial assets

$

103,954

$

8,683

$

112,637

$

67,768

$

4,373

$

72,141

Financial Liabilities

Foreign exchange forward contracts

$

—

$

1,558

$

1,558

$

—

$

1,426

$

1,426

Employee deferred compensation plan liability

46,211

1,886

48,097

48,425

2,204

50,629

Total financial liabilities

$

46,211

$

3,444

$

49,655

$

48,425

$

3,630

$

52,055

The Company did not have any material assets or liabilities measured at fair value on a recurring basis using Level 3 inputs as of July 1, 2018 and December 31, 2017. There were no transfers between Level 1, Level 2 and Level 3 fair value hierarchies during the three and six months ended July 1, 2018 and July 2, 2017 related to these securities.

Valuation Techniques:

There have been no changes to the valuation techniques used to measure the fair value of the Company's assets and liabilities. For a description of the valuation techniques, refer to Note 6 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain of the Company’s assets, including intangible assets, goodwill and cost-method investments, are measured at fair value on a nonrecurring basis if impairment is indicated.

Fair Value of Long-Term Debt

As of July 1, 2018, the carrying value of the Company's senior secured credit facility was $492.0 million (See Note 9). The carrying value of the Company's senior secured credit facility approximates its fair value since it bears an interest rate that is comparable to rates on similar credit facilities and is determined using Level 2 inputs.

The Company's 2% 2020 Spansion Exchangeable Notes assumed as part of the Company's merger with Spansion Inc. ("Spansion"), which was completed on March 12, 2015 (the "Merger"), are traded in the secondary market for debt instruments and are categorized as a Level 2 liability. The principal and the estimated fair value of the principal of theses notes as of July 1, 2018 were $12.0 million and $37.2 million, respectively. See Note 9 for further details.

19

The Company’s 4.5% 2022 Senior Exchangeable Notes are traded in the secondary market for debt instruments and the fair value is determined using Level 2 inputs. The principal and the estimated fair value of the principal of these notes as of July 1, 2018 were $287.5 million and $380.2 million, respectively. See Note 9 for further details.

The Company's 2% 2023 Exchangeable Notes are traded in the secondary market and the fair value is determined using Level 2 inputs. The principal and the estimated fair value of the principal of these notes as of July 1, 2018 were $150.0 million and $156.6 million, respectively. See Note 9 for further details.

NOTE 7. RESTRUCTURING

Since 2016, the Company has launched certain long-term strategic corporate transformation initiatives which required restructuring activities to streamline internal processes and redeploy personnel and resources to target markets as discussed below:

2018 Restructuring Plan

During the first quarter of fiscal 2018, the Company began implementation of a reduction in workforce (the "2018 Plan") which will result in elimination of approximately 75 positions across various functions. The restructuring costs of $1.6 million and $3.1 million during the three and six months ended July 1, 2018, respectively, consist of personnel costs. The Company anticipates that the remaining restructuring accrual balance of $0.8 million will be paid out in cash through fiscal 2018.

2017 Restructuring Plan

In December 2017, the Company began implementation of a reduction in workforce (the "2017 Plan") which resulted in the elimination of approximately 80 positions worldwide across various functions. A restructuring credit of $0.1 million and a cost of $2.4 million for the three and six months ended July 1, 2018, respectively, consist of personnel costs. The Company anticipates that the remaining restructuring accrual balance of $30 thousand will be paid out in cash through fiscal 2018.

2016 Restructuring Plan

In September 2016, the Company began the implementation of a reduction in workforce (the "2016 Plan") which resulted in the elimination of approximately 430 positions worldwide across various functions. A restructuring credit of $0.2 million was recorded for the three and six months ended July 1, 2018 related to the 2016 Plan. The restructuring cost related to the 2016 Plan during the three months ended July 2, 2017 consists of $0.4 million personnel cost and $0.5 million facilities-related expenses. The restructuring cost of $3.5 million recorded for the six months ended July 2, 2017 consists of personnel costs of $1.9 million, and other charges related to the write-off of certain licenses and facilities-related expenses of $1.6 million. The Company paid out the remaining restructuring cost of $0.5 million, which consisted of personnel costs, by July 1, 2018.

In March 2015, the Company implemented cost reduction and restructuring activities in connection with the Merger. No restructuring charges were recorded for the three and six months ended July 1, 2018 or July 2, 2017, related to the Spansion Integration Plan. The Company anticipates that the remaining restructuring accrual balance of $9.9 million, which relates to an excess lease obligation, will be paid out in cash over the remaining lease term through fiscal 2026.

Summary of Restructuring Costs

The following table summarizes the restructuring charges recorded in the Consolidated Statements of Operations:

20

Three Months Ended

Six Months Ended

July 1, 2018

July 2, 2017

July 1, 2018

July 2, 2017

(In thousands)

Personnel costs

$

1,239

$

374

$

5,335

$

1,877

Other

—

524

—

1,593

Total restructuring costs

$

1,239

$

898

$

5,335

$

3,470

The following table summarizes the restructuring costs by line item recorded in the Condensed Consolidated Statements of Operations:

Three Months Ended

Six Months Ended

July 1, 2018

July 2, 2017

July 1, 2018

July 2, 2017

(In thousands)

Cost of goods sold

$

1,589

$

—

$

3,476

$

231

Research and development

33

358

326

2,710

Selling, general and administrative

(383

)

540

1,533

529

Total restructuring costs

$

1,239

$

898

$

5,335

$

3,470

Roll-Forward of the Restructuring Reserves

Restructuring activity under the Company's restructuring plans was as follows:

(In thousands)

2018 Plan

2017 Plan

2016 Plan

Spansion Integration Plan

Total

Accrued restructuring balance as of December 31, 2017

$

—

$

6,139

$

743

$

11,297

$

18,179

Provision

3,148

2,421

(234

)

—

5,335

Cash payments and other adjustments

(2,319

)

(8,530

)

(509

)

(1,389

)

(12,747

)

Accrued restructuring balance as of July 1, 2018

$

829

$

30

$

—

$

9,908

$

10,767

Current portion of the restructuring accrual

$

829

$

30

$

—

$

2,064

$

2,923

Non-current portion of the restructuring accrual

$

—

$

—

$

—

$

7,844

$

7,844

NOTE 8. EMPLOYEE STOCK PLANS AND STOCK-BASED COMPENSATION

The following table summarizes the stock-based compensation expense by line item recorded in the Condensed Consolidated Statements of Operations:

Three Months Ended

Six Months Ended

July 1, 2018

July 2, 2017

July 1, 2018

July 2, 2017

(In thousands)

Cost of revenues

$

3,985

$

4,000

$

7,569

$

7,885

Research and development

13,801

9,776

20,514

20,062

Selling, general and administrative

16,122

10,574

24,283

19,557

Total stock-based compensation expense

$

33,908

$

24,350

$

52,366

$

47,504

As of July 1, 2018 and December 31, 2017, stock-based compensation capitalized in inventory totaled $3.9 million and $3.3 million, respectively.

21

The following table summarizes the stock-based compensation expense by type of awards:

The following table summarizes the unrecognized stock-based compensation expense, by type of awards:

As of

July 1, 2018

Weighted-AverageAmortizationPeriod

(In thousands)

(In years)

RSUs and PSUs

107,973

1.54

ESPP

998

0.50

Total unrecognized stock-based compensation expense

$

108,971

1.53

Equity Incentive Program

As of July 1, 2018, approximately 38.4 million stock options, or 21.6 million RSUs and PSUs were available for grant as stock-based awards under the 2013 Stock Plan, the 2010 Equity Incentive Award Plan (formerly the Spansion 2010 Equity Incentive Award Plan) and the 2012 Incentive Award Plan (formerly the Ramtron Plan). As of July 1, 2018, there were 1.9 million shares of stock available for issuance under the ESPP plan.

Stock Options

The following table summarizes the Company's stock option activities:

Shares

Weighted-AverageExercisePrice PerShare

Weighted Average Remaining Contractual term

Aggregate Intrinsic Value

(In thousands, exceptper-share amounts)

(In years)

($ in millions)

Options outstanding as of December 31, 2017

4,627

$

11.63

Exercised

(875

)

$

9.86

Forfeited or expired

(41

)

$

15.86

Options outstanding as of April 1, 2018

3,711

$

12.00

Exercised

(266

)

$

9.87

Forfeited or expired

(20

)

$

15.35

Options outstanding as of July 1, 2018

3,425

$

37.22

2.15

$

13.9

Options exercisable as of July 1, 2018

3,345

$

12.18

2.11

$

13.5

No options were granted during the three or six months ended July 1, 2018.

22

RSUs and PSUs

The following table summarizes the Company's RSU and PSU activities:

Shares

Weighted-AverageGrantDate FairValue PerShare

(In thousands, exceptper-share amounts)

Balance as of December 31, 2017

11,976

$

12.44

Granted

5,310

$

16.55

Released

(2,707

)

$

12.75

Forfeited

(666

)

$

12.85

Balance as of April 1, 2018

13,913

$

13.92

Granted

432

$

16.52

Released

(1,022

)

$

12.99

Forfeited

(324

)

$

13.12

Balance as of July 1, 2018

12,999

$

14.03

2018 Long-Term Incentive Program

During the first quarter of 2018, the Compensation Committee of the Company approved the issuance of service-based and performance-based restricted stock units under the Company's Long-Term Incentive Program ("LTIP") to certain employees. The milestones for the 2018 LTIP grants include service and performance conditions based on revenue growth and profit milestones over the next 3 years. A portion of the LTIP awards include a multiplier based on certain market conditions.

NOTE 9. DEBT

Total debt is comprised of the following:

As of

July 1, 2018

December 31, 2017

(In thousands)

Current portion of long-term debt

Senior Secured Credit Facility:

Term Loan B

$

6,314

$

27,303

Capital lease obligations

406

—

Current portion of long-term debt

6,720

27,303

Revolving credit facility and long-term portion of debt

Senior Secured Credit Facility:

Revolving Credit Facility

—

90,000

Term Loan B

485,714

468,080

2% 2020 Spansion Exchangeable Notes

11,274

20,375

4.5% 2022 Senior Exchangeable Notes

251,695

246,636

2% 2023 Exchangeable Notes

133,237

131,422

Capital lease obligations

1,821

—

Credit facility and long-term debt

883,741

956,513

Total debt

$

890,461

$

983,816

As of July 1, 2018, the Company was in compliance with all of the financial covenants under all of its debt facilities.

On March 12, 2018, the Company amended its Amended and Restated Credit and Guaranty Agreement, which governs the Senior Secured Credit Facility. The amendment reduces the applicable margins on the Revolving Credit Facility and Term Loan B. After giving effect to the amendment, the Term Loan B bears interest, at the option of the Company, at the base rate plus an applicable margin of 1.25% or the Eurodollar rate plus an applicable margin of 2.25%; and the Revolving Credit Facility bears interest, at the option of the Company, at the base rate plus an applicable margin of either 0.75% or 1.00%, depending on the Company's secured leverage ratio, or the Eurodollar rate plus an applicable margin of 1.75% or 2.00%, depending on the Company's secured leverage ratio. The amendment removed the fixed charge coverage ratio financial covenants. In addition, for Term Loan B, the amendment removed the total leverage ratio covenant, changed the required amortization payments to 1% per annum, and waived the excess cash flow mandatory repayment for fiscal 2017.

As of July 1, 2018, $504.0 million aggregate principal amount of loans, all of which related to Term Loan B, were outstanding under the senior secured credit facility.

2% 2020 Spansion Exchangeable Notes

Pursuant to the Merger, Cypress assumed Spansion's 2% 2020 Spansion Exchangeable Notes (the "Spansion Notes") on March 12, 2015. They are fully and unconditionally guaranteed on a senior unsecured basis by the Company. The Spansion Notes will mature on September 1, 2020, unless earlier repurchased or converted, and bear interest of 2% per year payable semi-annually in arrears on March 1 and September 1. The Spansion Notes may be due and payable immediately in certain events of default.

On March 7, 2018, the Company entered into a privately negotiated agreement to induce the extinguishment of $10 million out of the $22 million of Spansion Notes outstanding. The Company paid the holders of the Spansion Notes cash for the aggregate principal of $10 million and delivered 1.4 million shares of common stock for the conversion spread. The Company recorded $0.2 million in loss on extinguishment and a reduction in additional paid-in capital of $25.7 million towards the deemed repurchase of the equity component of the notes. The loss on extinguishment is recorded in "Interest Expense" in the Condensed Consolidated Statements of Operations.